Grant the forgotten depression; 1921, the crash that cured itself (2014)

Thank you for downloading this Simon & Schuster eBook Join our mailing list and get updates on new releases, deals, bonus content and other great books from Simon & Schuster CLICK HERE TO SIGN UP or visit us online to sign up at eBookNews.SimonandSchuster.com CONTENTS Epigraph Preface The Great Inflation Coin of the Realm Money at War Laissez-Faire by Accident A Depression in Fact City Bank on the Carpet Egging On Deflation A Debacle “Without Parallel” The Comptroller on the Offensive 10 A Kind Word for Misfortune 11 Not the Government’s Affair 12 Cut from Cleveland’s Cloth 13 A Kind of Recovery Program 14 Wages Chase Prices 15 Shrewd Judge Gary 16 “A Higher Sense of Service” 17 Gold Pours into America 18 “Back to Barbarism?” 19 America on the Bargain Counter 20 All for Stability Epilogue: A Triumph, in Its Way Photographs Acknowledgments About the Author Notes A Select Bibliography Index In memory of A Alex Porter, investor, scholar, bon vivant In the economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects Of these effects, the first only is immediate; it manifests itself simultaneously with its cause— it is seen The others unfold in succession—they are not seen: it is well for us if they are foreseen —Frederic Bastiat, “That Which Is Seen, That Which Is Unseen,” 1850 PREFACE This slim volume describes a weighty and wonderful event In 1920, the American economy entered what would presently be diagnosed as a depression The successive administrations of Woodrow Wilson and Warren G Harding met the downturn by seeming to ignore it—or by implementing policies that an average 21st century economist would judge disastrous Confronted with plunging prices, incomes and employment, the government balanced the budget and, through the newly instituted Federal Reserve, raised interest rates By the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined Yet by late 1921, a powerful, job-filled recovery was under way This is the story of America’s last governmentally unmedicated depression The United States was not without a government in the early 1920s, of course It taxed and regulated It furnished courts, the rule of law, a dollar defined in law as a weight of gold and an army and navy Federal officers examined the nationally chartered banks Other public officials infused illiquid though solvent banks with cash Contemporaries credited the latter functionaries—new hires of the Federal Reserve—with forestalling an otherwise certain money panic What the government did not was socialize the risk of financial failure or attempt to steer and guide the national economy by manipulating either the rate of federal spending or the value of the dollar Compared to the federal establishment that would take form in the 1930s (or to that which had recently waged the war against Germany), it was a small and unintrusive government The hero of my narrative is the price mechanism, Adam Smith’s invisible hand In a market economy, prices coordinate human effort They channel investment, saving and work High prices encourage production but discourage consumption; low prices the opposite The depression of 1920–21 was marked by plunging prices, the malignity we call deflation But prices and wages fell only so far They stopped falling when they became low enough to entice consumers into shopping, investors into committing capital and employers into hiring Through the agency of falling prices and wages, the American economy righted itself I write in the fifth year of a historically lackluster recovery from the so-called Great Recession of 2007–09 To address the crisis of failing banks and collapsing credit, the administrations of George W Bush and Barack Obama borrowed and spent hundreds of billions of dollars They threw a governmental lifeline to dozens of financial institutions, some of which would have otherwise drowned The Federal Reserve pushed its money-market interest rate to zero and materialized trillions of new dollars (thereby further subsidizing the banks and government-sponsored enterprises whose errors of omission and commission had helped to precipitate the crisis in the first place) Yet for all these exertions, some 9.8 million Americans remain out of a job while millions more have given up hope of finding one Just about no one with a public voice nowadays would dare to propose the policies that the government implemented (or, more to the point, refused or neglected to implement) almost a century ago But the fact is that, in the wake of those decisions, growth resumed and the 1920s proverbially roared We can’t know what might have been if Wilson and Harding had intervened as presidents of the late 20th and early 21st centuries are wont to Herbert Hoover, Harding’s secretary of commerce, was seemingly champing at the bit to act; the slump was ending by the time he swung into action When, as the 31st president, Hoover did intervene—notably, in an attempt to prevent a drop in wages—the results were unsatisfactory Recessions and depressions don’t announce their own arrival Economists rather piece together the chronology after the fact The recognized arbiter of the cyclical calendar, the National Bureau of Economic Research, dates the start of the downturn of 1920–21 in January 1920 and its conclusion in July 1921; which is to say that things stopped getting better in January 1920, and they stopped getting worse in July 1921 The elapsed time was 18 months On the one hand, a year and a half is a very long time to any who suffered unemployment, bankruptcy or destitution On the other, it is a great deal shorter than the 43 months of the Great Depression of 1929–33 I propose that constructive federal inaction contributed to the relatively satisfactory outcome To the financiers and capitalists weaned on the idea of laissez-faire, federal passivity did not destroy confidence but rather enhanced it “Confidence” is a concept as vital as it is amorphous What imparts a feeling of trust to one generation may frighten another What seemed to brace up the generation of Americans who confronted the 1920–21 slump was a collective belief in the underlying soundness of American finance In a world that in many ways had seemed to have lost its moorings, the dollar was still as good as gold A bipartisan determination to pay down the federal debt and to protect the purchasing power of the U.S dollar thus likely contributed to a belief that the bad times couldn’t and wouldn’t last “If a government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone,” wrote Murray Rothbard in his history of the 1930s, America’s Great Depression “Only if there is no interference, direct or threatened, with prices, wage rates and business liquidation, will the necessary adjustment proceed with smooth dispatch.”1 Whatever might be said about that proposition in general, the American experience in 1920–21 and 1929–33 does not disprove it • • • The Great Depression was the historical touchstone of the advocates of a muscular federal response to our own Great Recession It was to close the door on any possible repetition of the experience of the early 1930s that the Federal Reserve, under the leadership of Chairman Ben S Bernanke, embarked on a radical program of money printing, interest-rate suppression and financial market manipulation, policies still in place more than five years after economic healing officially began In a speech at Jackson Hole, Wyoming, in August 2012, Mr Bernanke candidly described these experiments as “learning by doing.” There was no such improvisation in the monetary and fiscal councils of 1920–21, unless the refusal of the still unseasoned Federal Reserve to budge from its policy of high interest rates even in the teeth of plunging prices can be viewed as experimental In any case, to the best of my knowledge, no American policy-maker invoked the extraordinary events of 1920–21 as a potentially relevant precedent during the crisis of 2008; the collapse of 1929–33 rather monopolized the market in historical analogy One can anticipate the arguments in defense of this choice Thus, in 1920–21, the economy was much smaller than it is today The political environment was wholly different than ours and the statistics produced to measure the expansion and contraction of economic activity were, at best, crude Besides, there was no federal safety net and no easily accessible credit, either of the personal or mortgage variety All this is true, yet each objection might be applied with nearly equal force to the Great Depression itself There is something else to consider: Following the 1929 Crash, President Hoover set in motion an unprecedented program of federal activism to head off the threatened business downturn While these interventions—the “First New Deal,” some called them—were an undisputed failure, the nonintervention of Wilson and Harding constitutes an uncelebrated success • • • If the events of 1920–21 are anything but irrelevant, they are—to the advocates of government intervention in business-cycle downturns—inconvenient If sick economies need governmentally administered medicine, how did an economy force-fed with what most practitioners today would regard as a kind of policy arsenic ever right itself? In his review of Austerity: The History of a Dangerous Idea, Mark Blyth’s 2013 attack on the notion of a government not pulling out the stops to combat a downturn, Lawrence Summers, the former secretary of the Treasury, quoted his own dictum: “As I have often said, the central irony of financial crisis is that while it is caused by too much confidence, too much lending and too much spending, it can only be resolved with more confidence, more lending and more spending.” The 1920–21 experience refutes Summers’s Paradox, as it was certainly not resolved with lending and spending.I Just how severe it was is a question yet unsettled, and perhaps destined never finally to be settled Official data as well as contemporary comment paint a grim picture Thus, the nation’s output in 1920–21 suffered a decline of 23.9 percent in nominal terms, 8.7 percent in inflation- (or deflation-) adjusted terms From cyclical peak to trough, producer prices fell by 40.8 percent, industrial production by 31.6 percent, stock prices by 46.6 percent and corporate profits by 92 percent.2 Maximum unemployment ranged between two million and six million persons—those were the range of estimates at the national conference on unemployment called by President Harding in September 1921—out of a nonagricultural labor force of 31.5 million At the high end of six million, this would imply a rate of joblessness of 19 percent Bankruptcies claimed myriad nonfarm businesses, including Truman & Jacobson, a Kansas City haberdashery coowned by the future 33rd president of the United States.II The adage that “the past is a foreign country” is nowhere more apt than in economic history In the case at hand, anachronism is inherent in the very language of economics Readers of this book speak and think about “aggregate demand” and “aggregate supply.” Having imbibed at least the rudiments of macroeconomics, they casually talk about the national income In the early 1920s, such ideas were yet unformed You can comb through the professional economics journals of the day, as I have done, without finding a single article espousing the notion of macroeconomic management Whatever the defects of 21st century American economic statistics, the data available to Wilson and Harding were worse Modern national income accounting did not come into existence until the 1930s and 1940s The services portion of the American economy was not systematically measured until the 1990s The 1920–21 affair was the 14th business-cycle contraction since the panic year of 1812 Commercial and financial disturbances of one kind or another occurred in 1818, 1825, 1837, 1847, 1857, 1873, 1884, 1890, 1893, 1903, 1907, 1910 and 1913 Not since the early 19th century had interest rates and, 198 in mining districts, 17 wages and, 104, 208 Cotton, 107, 120, 153, 190 price of, 42, 47, 78, 82, 100, 106, 128, 182–84 Council of Economic Advisers, 6, 68n, 212 Cox, James M., 129–31, 133 Crash of 1929, 109, 213–17 “Creative destruction,” 71n Crissinger, Daniel R., 176 Crocker, William H., 162 Crowded Years (McAdoo), 40n Crozier, General William, 56 Crucible Steel, 160 Cuba, 20, 84–87, 90–91, 103, 127 Cuba Sugar Cane, 151 Dallas, Federal Reserve Bank of, 42 Davis, James J., 5n, 169–70 Davis, John W., 203 Davison, Henry P., 36–37 Dawes, Charles, 137, 138 Debs, Eugene V., 12, 129, 133 Declaration of Independence, 34 Democrats, 64, 85, 94, 140–41, 164, 202, 204, 212 bonus bill opposed by, 138 Federal Reserve founded by, 31–32, 103 in presidential elections, 13, 24, 128–30, 132, 133, 203 Progressive, 8, 42 Southern, 183 wartime policies of, 58, 59 Detroit, 24 automobile industry in, 31, 72–73, 186, 195–96 Dodge, Cleveland H., 162 Dodge, M Hartley, 89 Dow, Charles, 149 Dow Jones, 149, 177 Industrial Average, 47, 69, 81, 100, 148, 151, 160, 163, 192, 195, 199, 217 Railroad Average, 148, 179, 199 Dun index, 184 Du Pont, Irénée, 185–86, 189 Du Pont, Pierre S., 162, 195 Durant, Billy, 17, 72–75, 194 E.I du Pont de Nemours and Company, 56–57, 74, 162, 185–86, 196–97 Economist, The, 152 Edwardian era, 41, 50 Eisenhower, Dwight D., 18 Ely, George W., 40 Employment Act (1946), 212 Employment Service, U.S., 169 Episcopalian Church, 94 Era of Good Feeling, 70 Excess-profits tax, 131, 145–47 Exchange rates, 41, 49, 84, 152, 203 fixed, 49, 123, 190 under gold standard, 111, 206, 208 Exports and imports, 14, 20, 27, 121, 167, 180, 190 during Great War, 40, 43–47 F.W Woolworth Company, 188, 197–98 Fall, Albert B., 203 Fall River (Massachusetts), 153 Federal Council of Churches of Christ Commission on Race Relations, 171 Federal Farm Credit Banks, 166 Federal Reserve Act (1913) 13, 31–35, 41–43, 46, 49, 103, 145, 177, 209 Federal Reserve, 18, 53–54, 62, 69, 99, 114, 176, 200 Board of Governors of, see Federal Reserve Board credit tightened by, 76, 95, 127 critics of, 15, 94, 97, 101–13, 123, 125, 213 deflation and, 92–94, 112–13, 119, 135 discount rate on commercial paper of, 101 gold standard and, Hoover and, 167, 214 index of industrial production, 68, 128 interest rates set by, 1–4, 24, 32, 72–73, 95, 97–98, 106–9, 112, 115, 117, 121, 124, 143, 179, 200, 209, 216 legislation establishing, see Federal Reserve Act National City Bank and, 83, 91 notes issued by, 26, 33, 35, 37, 45, 49, 95, 129, 181–82 presidential elections and, 130, 203 regional banks of, 32, 42, 48, 50n, 53, 96, 108, 112, 120, 124, 143, 179, 210, 216–17 (see also Federal Reserve Bank of New York) stability and, 203–5, 211 Treasury and, 24–26, 37, 42, 45, 49, 92, 95n, 96, 205 Federal Reserve Board, 32, 33, 37, 93–108, 151, 169, 181n, 204, 210 background of members of, 93–94, 98 bankers and, 45, 81 deflation campaign of, 118, 121, 123, 127 Mellon and, 143 Senators’ allegations against, 183–84 Treasury and, 95n, 96 Williams’s criticisms of, 104–8, 111–13, 116, 117, 125–26, 177 Federal Reserve Bank of New York, 7, 126, 127, 204, 209 Federal Reserve Bank of North Dakota, 124 Federal Steel Corporation, 157 Federal Trade Commission, 157 Ferrell, Robert H., 79 Fiat money, 36 First National Bank of Birmingham, 94, 100 First National Bank of Chicago, 43 First National Bank of Kemp, Texas, 46 First National Bank of Muskogee, 103 First National Bank of New York, 31, 162 First World War, see Great War Fiscal policy, 50, 51 Fisher, Irving, 27–29, 44, 49, 111, 123, 203, 216, 217 Fisher, Oliver M., 83n Fisher Body Corporation, 17 Fitzpatrick, John, 15 Florida, 73, 86 Food Aid Administration, U.S., 166 Food Control Act (1917), 23 Ford, Henry, 73, 214 Ford Motor Company, 73, 195–96 Fordney, Joseph W., 138, 145–46 Forgan, James B., 43 Fourteen Points, 55, 60 France, 25, 28, 49, 99 central banking in, 27, 43, 48, 209 gold shipped to U.S from, 179 peace conference in, 61 postwar inflation in, 24 in World War I, 59, 60, 76, 151, 168 Fraser, H.F., 211 Freeman, 164 Frelinghuysen, John S., 139 Friedman, Milton, 213 Frisch, Ragnar, 67n Garfield, Harry A., 57–59 Garfield, James A., 57 Gary, Elbert H., 156–63 Geddes, Auckland, 66 General Electric, 82 General Motors Corporation (GM), 17–18, 72–75, 82, 151, 194–97 Genoa, 88, 206 Georgia Press Association, 126 Germany, 49, 151–52, 166, 180, 200 postwar inflation in, 99, 152, 210 Reichsbank, 37, 209 war against, see Great War Gillette Safety Razor Company, 197 Glass, Carter, 31, 103, 117, 145 Goldsborough, T Alan, 203 Gold standard, 7, 24–29, 50, 123, 180, 210, 213 constraints inherent in, 150 exchange rates under, 111, 206, 208 Federal Reserve and, 32, 96 during Great War, 38, 41, 46, 49, 52 Keynes on, 207 Gold Standard Act (1900), 25 Gompers, Samuel, 152, 154, 165n, 171 Grace, Eugene G., 114 Graham, Benjamin, 196–97 Grayson, Cary, 63–65 Great Depression, 3–4, 68, 75n, 123n, 203, 212 Hoover’s role in, 4, 8, 213–18 Great Northern Paper Company, 58 Great Recession (2007–09), 2, 67–68 Great War, 2, 45, 135, 160, 180, 196, 204 American battlefield deaths in, 60, 70n American entry into, 8, 13, 50–51 cease-fire ending, see Armistice Debs imprisoned during, 129 economic policy and regulations during, 55–60, 65, 100, 112 farming during, 20 financing of American role in, 136, 146, 183 (see also Liberty Bonds) French housing devastated during, 151 Hoover during, 166 inflation caused by, 22–23, 41, 49, 82, 125, 182 influenza epidemic following, 11 outbreak of, 38, 39, 43, 45 peace treaty after, 154 (see also Versailles Treaty) Truman in, 18 veterans of, 138 Green, William, 214 Greenbackism, 36 Gregory, T.E., 70 Grosse Pointe (Michigan) Church, 72n Gross national product (GNP), 8–9, 14, 68 Guaranty Trust Company of New York, 20, 113–18, 176–78 Guggenheim, Daniel, 103–4, 114, 122 Guggenheim Brothers, 114 Hamilton, Alexander, 7, 32, 36 Hamilton, William Peter, 148, 150, 193 Hamiltonians, 131, 142, 144, 145, 147 Hamlin, Charles S., 94n, 95n, 217 Hammermill Paper Company, 122 Harding, W.P.G., 36, 103, 118, 125–27, 213 banking career of, 94, 100 deflation campaign of, 119–20, 124–25 educational background of, 93, 94 interest-rate policies of, 95–98 Senators’ unfounded allegations against, 183–4 warnings about Guaranty Trust ignored by, 176, 177 Williams’s correspondence with, 104–8, 111–13, 116, 117 Harding, Warren G., 1, 2, 4, 7, 129–44, 176, 202, 212–13, 217 agricultural concerns of, 78, 165–66, 190 bonus bill opposed by, 138–41, 201 Bureau of the Budget created by, 137 death of, 165, 203 economic data available to, 5, 172 election of, 70, 78, 85, 133–34, 252 friendly personality of, 164–66 inauguration of, 85, 135–36 Joint Commission of Agricultural Inquiry created by, 78 labor unions and, 154–55 Mellon as Treasury Secretary under, 136, 138, 142–47, 176, 178 presidential nomination and campaign of, 129–33 unemployment during presidency of, 70–71, 167–68, 170–75 Washington Naval Conference convened by, 137 Harrison, Benjamin, 138 Harvard University, 4n, 94n, 154, 162, 207 Economics Society, Haynes, George E., 171 Heflin, J Thomas, 183–84 Hepburn, A Barton, 98, 151 Hershey, Milton S., 85 Highways, 18, 173 Historical Statistics of the United States, 67, 69 Hoarding, 23, 46 Hoover, Herbert, 59, 76, 166, 186 as Secretary of Commerce, 2, 71, 155, 166–67, 170–74, 189, 203 presidency of, 4, 8, 72, 213–18 Hoover, Lou Henry, 166 House, Edward M., 132 House of Representatives, U.S., 13, 61, 103, 133, 140, 201, 202 Banking Committee, 204 Ways and Means Committee, 145 Housing market, 189–90 Houston, David F., 65, 94n, 145, 164, 165 Hughes, Charles Evans, 137 Immigration, 68, 131 Income tax, 12, 13, 64, 145–47 corporate, 147, 221n2 India, 99 Industrial Workers of the World (IWW), 16 Influenza pandemic (1919), 11 Insider trading, 148–49 Insolvency, 45, 47, 70, 114, 127, 215 Inspiration Copper Company, 110 Interest rates, 47, 66, 81–82, 101, 164, 181–82, 189, 198, 213 bank, 43, 53, 89, 102, 126 European, 26, 27, 48 Federal Reserve setting of, 1–4, 24, 32, 72–73, 95, 97–98, 106–9, 112, 115, 117, 121, 124, 143, 179, 200, 209, 216 gold standard and, 206 Mellon’s views on, 136, 142–44, 212 on mortgage debt, 76 speculation and, 70 Interior Department, U.S., 171 International Harvester Corporation, 154, 200, 216 International Paper, 151 Interstate Commerce Commission, 58, 120n, 179 Investment Bankers Association, 102 Iowa, 77, 191 State Board of Agriculture, 21 Italy, 88, 99, 206 J.C Penney Company, 188 J.H Fitts & Company, 94 J.P Morgan Chase, 109 J.P Morgan & Company, 74, 100, 113, 114, 119n, 178, 179, 183 Jackson, Andrew, 32 Jackson County (Missouri) Court, 79 Jacobson, Eddie, 18, 19, 78–79 Japan, 76, 82, 96, 99 postwar inflation in, 24 Jefferson, Thomas, 32 Jekyll Island (Georgia), 37 Joint Commission of Agricultural Inquiry, 78, 126 Journal of Monetary Economics, 68n Joyce, William B., 88 Justice Department, U.S., 22, 24 Kane, Thomas P., 87 Kansas, 77–78, 108 Kansas City, 18–19, 77, 107 Federal Reserve Bank of, 108 Keller, Oscar E., 146 Kemmerer, Edwin W., 92, 125n Kendrick, John, 69 Kenyon, William S., 130n, 173–74 Keynes, John Maynard, 27, 111, 123–25, 173n, 175, 203, 205–7, 209 Kirby, Thomas B., 44n Kuznets, Simon, 69 Labor Department, U.S., 17, 68, 165n, 169, 184 Labor unions, see Unions LaFollette, Robert M., 203 Laissez-faire, 3, 8, 11, 28, 94, 164, 205 Lamont, Thomas W., 114 Lansing, Robert, 65 Lasker, Albert D., 131n Lauck, W Jett, 119–20n Lawrence (Massachusetts), 153 League of Nations, 16, 63, 128, 130, 133, 135 opponents of, 8, 22, 66, 129, 183 Ledoux, Urbain, 168 Leffingwell, Russell C., 96, 138 Lenroot, Irvine Luther, 127 Lewis, John L., 17, 172–73, 214 Liberty Bonds, 50, 52–53, 106, 165 below-market bank loans to purchasers of, 53, 88 falling prices for, 69, 96, 101 Metropolitan Opera House event for, 59–60 Liquidation, 3, 92, 97, 149, 182, 195, 214 deflationary, 120, 150 of inventories, 101, 129n, 186, 188n of labor, 172, 173, 175 of loans, 21, 70, 98, 129n Liquidity, 30, 43, 45, 202 Liverpool, Lord, 207 Lloyd George, David, 66, 206 Lodge, Henry Cabot, 61 Lombard Street (Bagehot), 47 London, 123, 166, 174 City of, 29, 91 Stock Exchange, 38, 39 Lowell (Massachusetts), 153 Macroeconomics, 5, 27, 67n, 73, 144, 166, 212 Madrid, 88 Stock Exchange, 38 Maine, 133 Bankers Association of, 80–81, 98 Manchester Guardian, 27, 206 Margin debt, 74 Marion Star, 129, 134 Marshall, Alfred, 28 Marshall, Thomas R., 65, 204 Masons, 94 Massachusetts, 153, 169 State Chamber of Commerce, 169 Mauretania (ship), 179–80 McAdoo, Eleanor Randolph Wilson, 42 McAdoo, William G., 40n, 42, 45, 46, 64–65, 87–88, 129n, 133 McKinley, William, 24–25, 131 Meatpacking industry, 154–55, 183 Meeker, Royal, 41 Mellon, Andrew, 152, 177, 201, 212, 213 as Treasury Secretary, 136, 138, 139, 142–47, 176, 178, 200, 203 Meltzer, Allan H., 179n, 213 Mencken, H.L., 132, 133, 135 Mercantile Bank of the Americas, 177–78 Metropolitan Life Insurance Company, 41, 122, 169, 191 Meuse-Argonne, Battle of, 60 Michaelson, Alfred, 146–47 Michigan Copper and Brass, 196 Miller, Adolph C., 93–95, 97 Miller, Luther, 134 Mills, Ogden, 127 Missouri, 108 Missouri Pacific Company, 110 Mitchell, David, 122 Mitchell, Wesley Clair, 70, 71, 215 Mittendorf, George S., 89 Monetary History of the United States (Friedman and Schwartz), 213 Monetary policy, 82, 94, 101, 175, 200, 205, 209–20, 216 Money markets, 43, 104, 144, 151, 179 London, 47–48 New York, 81, 95, 109 Monopolies, 31, 157 Montgomery Ward & Company, 188 Montreal Stock Exchange, 38 Moody, John, 148–49n Moore, W.J., 190 Morgan, House of, see J.P Morgan & Company Morgan, J.P., 36, 156 Morgan Guaranty Trust Company, 178n Morgenstern, Oskar, 69 Morrison, Frank, 13–14 Municipal bonds, 45, 145, 146, 177 Muscle Shoals (Tennessee), 57 Nashville, 24 National Association of Real Estate Boards, 167 National Bank of Commerce, 19, 31, 106n, 176–78nn National Bank Examiners, 106 National Banking Acts (1863, 1864), 33 National Bureau of Economic Research, 2, 174 National City Bank, 83–91, 103, 108, 176n, 193–94, 203 below-market loans made by, 88–90 deposits held by, 113–14 notes issued by, 31 overseas operations of, 19–20, 83–87, 90–91, 117–18 reserves of, 33, 83 Treasury Department mole of, 87–88 National Conduit and Cable Company, 110 National Confederation of Construction Industries, 173 National Credit Men’s Association, 102 National Credit Office, 188n National Farmers Union, 78 National Hardware Association, 101 National income accounting, 69 National Liberal Club, 205–6 National Recovery Administration (NRA), 172 National Surety Company, 88 Nation’s Business, 136 Navy, U.S., 137 Nebraska, 108 Netherlands, 88, 99 New, Harry, 174 New Bedford (Massachusetts), 153 New Deal, 172 New Jersey, 58, 195 tunnels connecting New York and, 42 New Mexico, 108 academic criticism of, 92 deflationary policy supported by, 101 gold deposited in, 181–82, 207 interest rate setting by, 98, 143, 150, 179, 216 Liberty Bonds and, 59–60 loans to member banks from, 20, 81, 87, 89, 113, 115–16, 178n opens for business, 42 as potential central bank on model of Bank of England, 48–51 speculation as concern of, 149–50 Strong appointed first governor of, 36–38 New York City, 40, 62, 72, 82, 86, 100, 106n, 166, 195 banking in, 25, 31, 43–45, 108, 198–99, 209 (see also names of banks) baseball in, 178n bonds issued by, 38 capital spending in, 150 coal shortage in, 58 dockworkers’ strike in, 61 gold shipped from France to, 26 money market in, 81, 95, 109 Police Department of, 168 press in, 64, 76, 78, 88, 153, 119, 133, 193–94 (see also New York Times; Wall Street Journal) suicides in, 122 tunnels connecting New Jersey and, 42 unemployment in, 41, 157 New York Herald, 153, 193–94 New York State, 73 superintendent of banks of, 116 New York State Bankers Association, 114 New York Stock Exchange, 64, 102, 148, 193, 210 falling prices of stocks on, 82 Governing Committee of, 150n and outbreak of Great War, 38–40, 44, 46 trading volume on, 199 New York Telephone Company, 150 New York Times, The, 5n, 13, 34, 39, 40, 58, 83n, 101, 103–4, 126, 141, 143, 144, 153, 154, 165n, 168, 174, 175, 189–90, 192n classified advertising pages of, 194–95 New York Tribune, 88, 133 New York World, 64, 76, 78 Noble, H.G.S., 38, 40 Norman, Montagu, 49, 143, 209–10 Norris, Frank L., 85, 87, 90–91 North Carolina, 107 Northern Pacific Corner, 39 Notes, 102, 188 bank, 26, 31, 46 Federal Reserve, 26, 33, 35, 37, 45, 49, 95, 129, 181–82 Treasury, 139, 144 Nourse, Edwin G., 191 Noyes, Alexander Dana, 43, 47 Obama, Barack, 2, 4n, Ohanian, Lee E., 218 Ohio, 129, 131, 151 Ohlin, Bertil, 210–11n Oklahoma, 103, 107, 108 Overend Gurney, 27 Owen, Robert L., 103, 108 Palmer, A Mitchell, 16–17, 22–24, 61 Panic of 1812, Panic of 1873, 39 Panic of 1907, 7, 14, 30, 37, 39, 43, 86, 114, 123n Paris Stock Exchange, 38 Payne, Frederick H., 101 Pennsylvania Society, 72 Penrose, Boies, 130 People’s Reconstruction League, 192n Philadelphia, 82, 216 Piggly Wiggly grocery stores, 188 Pittsburgh, steel industry in, 73 Platt, Edmund, 94n Ponzi, Charles, 102 Pope, Alexander, 107 Populist Party, 12, 183 Post Office, U.S., 199 Presbyterianism, 36 President’s Conference on Unemployment, 19, 70–71, 170 Princeton University, 13, 36, 125n, 215n Procter, William C., 171 Procter & Gamble, 171 Profiteering, 103, 129, 130, 158, 205 union denunciations of, 63, 154 war, 22–24, 146 Profit margins, 68, 121, 172, 240 Progressive Party, 203 Progressivism, 12, 13, 42, 131–33 Prohibition, 70, 106, 148 Puerto Rico, 131n Pullman Company, 114 Puritans, 36 Quota Act (1921), 68, 199 Radio Corporation of America, 197 Railroads, 12, 121, 171, 193–94, 199 bankrupt, 86, 115 in Cuba, 20, 84 equities of, 96, 100–102, 177 (see also Dow Jones Railroad Average) inflated rates charged by, 76, 77 passenger, displaced by automobiles, 199 wage reductions for workers on, 119–20n, 159 wartime government control of, 13, 55–58, 63, 167, 179 Railway Labor Board, 119n Recent Economic Changes in the United States (1929), 71, 174, 186, 208 Rectanus, S.R., 121–22 Red scare, 66, 70 Reed, James Alexander, 58, 138 Regions Financial Corporation, 94 Reily, E Mont, 131 Religious Society of Friends, 166 Remington Arms Company, 89 Remnick, William H., 150n Republicans, 60–61, 88, 94n, 127, 164, 173–74 bonus bill supported by, 138 Federal Reserve opposed by, 33 “Independent,” 146 League of Nations opposed by, 22, 129, 183 presidential elections, 12–13, 24–25, 67, 85, 128–34, 151, 155 Senate majority of, 61, 133, 202 Republic Iron and Steel Company, 160, 162 Residential construction, 189–90 Revenue Act (1921), 147 Revolutionary War, 51 Rice, Stuart A., 121 Rist, Charles, 209–10 Roberts, George E., 102 Rogers, James Harvey, 215 Rogoff, Kenneth, 4–5n Roman Empire, 70 Romer, Christina D., 6, 68, 69 Rome Stock Exchange, 38 Roosevelt, Franklin D., 8, 130 Roosevelt, Theodore, 12, 59, 130, 132, 183 Root, Elihu, 33–35, 43 Rothbard, Murray, Rueff, Jacques, 207–8 Runnells, John S., 114 Russia, 29, 84, 114, 166 Soviet, 190, 216 Russian Revolution, 15, 16, 19–20 Ryan, John D., 159 Ryan, Thomas Fortune, 86, 101, 114, 115 S.S Kresge Company, 188 Sabin, Charles H., 114, 115, 178n St Petersburg Stock Exchange, 38 Samuelson, Paul, 28 San Francisco, 162, 166 Federal Reserve Bank of, 50n Save-a-Life League, 12 Savings banks, 30, 39, 102, 198–99 Schacht, Hjalmar, 209–10 Schumpeter, Joseph, 71n Schwab, Charles M., 72, 81, 156, 171 Schwartz, Anna, 213 Seaboard Air Line Railway System, 86, 115 Seamen’s Bank for Savings, 36, 38 Sears, Roebuck & Company, 151, 188 Seattle general strike, 16 Secret Service, 64 Security State Bank, 79 Self-liquidating loans and bills, 30, 32, 36, 52, 53 Senate, U.S., 60–61, 95, 112, 141, 174, 184 Agriculture Committee, 165 bonus bill in, 138–40, 201 Federal Reserve Act in, 33, 103 Finance Committee, 145–46 Foreign Relations Committee, 61, 62 Military Affairs Committee, 59 opposition to League of Nations in, 8, 66, 183 Republican majority in, 61, 133, 202 Shideler, James H., 77 Silber, William L., 40n Sioux City (Iowa), 77 Skidelsky, Robert, 175 Sloan, Alfred P., Jr., 18, 74 Smith, Adam, Smith, Gene, 64 Smith, Sherrill, 83–84 Snyder, Carl, 204, 210 Socialism, 12, 13, 56, 62, 129, 152, 216 wartime, 8, 106 Socialist Party, 12, 129 South Carolina, 191 University of, 94n Spanish-American War, 52 Sparkes, Boyden, 133–34 Speculators, 70, 74, 85, 103, 149, 163 Stamp, Josiah, 208 Standard Oil Corporation, 183 of New Jersey, 114 Stanford University, 166 Stars and Stripes, 139 State bonds, 145, 177 Steel industry, 99, 130, 151, 157–58, 194, 197 automobile industry and, 73 boom in, 209 construction industry and, 189 labor costs in, 153, 172 railroads and, 121 strikes against, 16, 72, 149, 157–58 See also Bethlehem Steel, U.S Steel Corporation Steel Workers Organizing Committee, 157 Stevens, John A., 106n Stillman, James, 19, 20 Stockholm University, 210n Stone, Warren S., 17 Storrow, James J., 58 Strong, Benjamin, 47–53, 111, 143, 204, 211n appointed governor of Federal Reserve Bank of New York, 36–38 background of, 36–37, 92 Bank of England and, 47–50, 211n as Bankers Trust executive, 35, 36, 49, 86, 93 death of, 213 divorce of, 48 establishment of Federal Reserve system opposed by, 35–37 during Harding administration, 126, 143, 204 Joint Commission of Agricultural Inquiry testimony of, 126 Liberty Loan Committee chaired by, 59–60 postwar economic of, 92–94, 127, 149–50, 207, 209–10 tuberculosis of, 48, 51 wartime measures advocated by, 45, 50–53 Strong, Katherine Converse, 48 Sugar, 20, 84–85, 98, 108, 118, 128, 151, 204 hoarding and profiteering on, 23, 24 Suicide, 37, 107, 122 Sullivan, Mark, 133, 146 Summers, Lawrence, Sunday, Billy, 70 Supply and demand, 95, 135, 140, 204 Survey of Current Business, 172, 217–18 Sweden, 99 Swift & Company, 155 Sykes, Thomas G., 72n Taft, William Howard, 12, 64, 130, 170 Tanner, James “Corporal,” 138 Tarbell, Ida, 171 Tariffs, 13, 58, 136, 167 protective, 131, 144, 145 Taxation: The People’s Business (Mellon), 142 Taxes, 1, 8, 31, 142, 167, 178, 193 bonds exempt from, 173 in Britain, 123 consumption, 136 excess-profits, 131, 145–47 Harding’s policies on, 131–32, 136, 138–40, 171, 201, 203 income, 12, 13, 64, 131, 145–47, 221n2 munitions, 56 negative impact on business of, 104, 114 public spending exceeding revenues from, 23, 50–52 real estate, 76 unemployment compensation financed by, 168 Taylorites, 215 Teapot Dome scandal, 203 Telegraph companies, 12, 13, 55 Telephone companies, 12, 13, 55, 150 Texas, 12, 42, 46 This Time Is Different (Rogoff), 4–5n Thompson, William “Big Bill,” 173 Thompson, William B., 109 Times of London, 208 Tobacco, 78, 182 Tokyo, 82 Topping, John A., 162 Tract on Monetary Reform (Keynes), 207 Trade, see Exports and imports Treasury, U.S., 7, 36, 49–53, 62, 94n, 140, 164, 201 comptroller of currency for, see Williams, John Skelton Federal Reserve and, 24–26, 37, 42, 45, 49, 92, 95n, 96, 205 financial panics allegedly forestalled by, 106 gold standard of, loans to European governments from, 14, 180 Mellon as Secretary of, 136, 138, 139, 142–47, 176, 178, 200, 203 during Panic of 1907, 25, 37 securities issued by, 26, 31, 32, 139, 144 (see also Liberty Bonds) taxes collected by, 56 (see also Income tax) Treman, Robert H., 101 Trigg, Ernest T., 173 Trimble, Richard, 161–62 Truman, Bess Wallace, 18 Truman, Harry S., 5, 18, 19, 78–70, 212, 213 Truman & Jacobson haberdashery (Kansas City), 5, 18–19, 78–79 Trust companies, 31, 87, 114–15, 117 See also Guaranty Trust Company of New York Trusts, 13, 208 Tumulty, Joe, 55–56, 61–63, 65, 133 U.S Steel Corporation, 14, 16, 40, 154, 156–63 Unemployment, 3, 40–41, 93, 157, 167–68, 202 in Britain, 207–8 exchange rates and, 123 Hoover’s conference on, 19, 70–71, 170–74 impact of Great War on, 47 Keynes on, 205–6 rates of, 5, 41, 47, 68 sales of goods reduced by, 152 social effects of, 121–22, 167 United Cigar Stores Company, 34 United Mine Workers of America, 16, 17, 172, 214 United States Chamber of Commerce, 136, 217 United States Trust Company, 106, 178 Vanderbilt, William, 42 Vanderlip, Frank, 19–20, 86 Versailles Treaty, 8, 22, 63, 66 Wilson’s vision for, 55, 60 (see also League of Nations) Victory bonds, 52, 69 Vienna Stock Exchange, 38 Virginia, 215 University of, 85 Wage reductions, 119n, 158, 159, 172, 214, 216 union responses to, 154–55, 174 Wales, 168 Wall Street Journal, 44, 63, 64, 81–82, 98, 103, 148–50, 159, 162, 163, 172, 178, 182, 187, 188, 192–94, 200, 201, 214, 216 Wallace, Henry, 190 Wallace’s Farmer, 76–77, 190 Walras, Leon, 28 Walton (Kentucky), 78 Wanamaker’s department store, 82, 96 Warburg, Paul, 37 War Department, U.S., 14 War of 1812, 11 Warfield, S Davies, 86 War Finance Corporation (WFC), 165 War Industries Board, 57 Warren, Harry M., 122 Washington, D.C., 23, 167–68 cotton growers march on, 78 race riots in, 62 Washington Naval Conference, 137 Watson, Thomas E., 183–84 Wells, David A., 71n Wheat, 20, 47, 190, 204 price of, 76, 78, 120, 124, 128, 191 When the Cheering Stopped (Smith), 64 When Washington Shut Down Wall Street (Silber), 40n White Motor Company, 187–88 Whitlock, Brand, 132 Whitney, Harry Payne, 114 Wiggin, Albert H., 86, 109–10 Williams, John Sharp, 138 Williams, John Skelton, 80–81, 85–91, 93, 97, 160, 186, 191 death of, 213 early career of, 85–86 Federal Reserve policies opposed by, 94, 97, 101–13, 123, 125 Guaranty Trust Company of New York criticized by, 113–19, 176–77 during Harding administration, 125–27 steel industry charged with profiteering by, 158–59 Williams College, 57 Wills, D.C., 94n Wilson, Edith Bolling, 63–66 Wilson, William B., 22 Wilson, Woodrow, 1, 2, 4, 7, 42, 87, 138, 164, 202, 204, 213, 217 caricatures of, 133 economic data available to, end of presidency of, 85, 125, 137, 145 Federal Reserve established by, 32, 33, 36, 41, 94, 209 gold deposits in Federal Reserve Bank of New York supported by, 50, 51 peace treaty priorities of, 55, 60–61, 66 (see also League of Nations) and postwar inflation, 20, 23–24, 61–62, 128, 212 presidential campaign of, 8, 13, 23 Progressivism of, 8, 131 stock exchange attitudes toward economic policies of, 39 stock holdings of, 162 stroke suffered by, 8, 64–66 unemployment relief considered by, 47 war economy of, 56–57 (see also Liberty Loans) Wilson & Company, 155 Wisconsin Steel Works, 154, 216 Withers, Hartley, 29–30, 32, 50 Woll, Matthew, 161 Woods, Arthur, 41n World War I, see Great War World War II, 20 Wyoming, 107, 108 Yale University, 27, 215 Youngstown Sheet and Tube Company, 159 Simon & Schuster 1230 Avenue of the Americas New York, NY 10020 Copyright © 2014 by James Grant www.SimonandSchuster.com All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever For information address Simon & Schuster Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020 First Simon & Schuster hardcover edition November 2014 SIMON & SCHUSTER and colophon are registered trademarks of Simon & Schuster, Inc The Simon & Schuster Speakers Bureau can bring authors to your live event For more information or to book an event contact the Simon & Schuster Speakers Bureau at 1-866-248-3049 or visit our website at www.simonspeakers.com Jacket design by Janet Perr Library of Congress Cataloging-in-Publication Data Grant, James, 1946–  The forgotten depression : 1921, the crash that cured itself / James Grant   pages cm  1. Depression—1920. 2. Financial crises—United States—History—20th century. 3. United States—Economic conditions— 1918–1945.  4. United States—Economic policy—20th century. I. Title HB37171920.G73 2014 330.973'0913—dc23 2014021387 ISBN 978-1-4516-8645-6 ISBN 978-1-4516-8648-7 (ebook) ... Gov’t spending Federal debt held by the public 310.04 - GNP - - 11.4% - - - - 78.7 - - - - $39,959 - - 227 601,146 91,500 859 - 14,958,300 48,198 - 6,358 60 3,457,079 11,139 23 25,952 244 28 9,018,882... printed The warring nations had fought their fight on the cuff They spent more than they raised in taxes, and they borrowed the difference And to one degree or another, they printed the money they... in the capital cities of the other former belligerents It was governments that had caused the runup in prices, or—a more analytically clarifying image the rundown in the value of the money they